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Debate over Chinese Investment in New Zealand Beef and Lamb Giant

ANALYSIS - One of New Zealand leading beef and lamb companies, Silver Fern Farms, is set to form a 50:50 partnership with major Chinese meat processor Shanghai Maling.

At the same time, the New Zealand farming cooperative has been the subject of a bid by another major sheep and beef cooperative, the Alliance Group.

The move for a 50 per cent investment in Silver Fern by Shanghai Maling was announced last month and will be put to the shareholders on 16 October.

The bid by the Alliance group is also expected to be discussed at the same meeting.

The moves have been the subject of a series of workshops taking place across New Zealand over recent weeks.

Rob Hewett, Chairman of Silver Fern Farms, said the Board’s recommendation to co-operative shareholders is to create a new 50:50 partnership with Shanghai Maling and to work together to grow a profitable long-term global business providing sustainable returns to shareholders.

“Under the proposed deal Shanghai Maling will invest NZ$261 million in cash for half of Silver Fern Farms’ business,” he said.

Mr Hewett added that by Shanghai Maling investing NZ$261 million of cash into the business in return for 50 per cent, the Co-operative will own 50 per cent of a business, whose equity value has effectively doubled in size.

He said: “The investment will be into a company, to be named Silver Fern Farms, which will own all of the assets of the business, and be owned 50 per cent by the existing Silver Fern Farms Co-operative and 50 per cent by Shanghai Maling.”

Silver Fern also plans to redeem the 5.5 million Supplier Investment Shares it has outstanding and pay a NZ$35 million special dividend to shareholders when the deal goes through.

Mr Hewett said: “Existing ordinary and rebate shareholders will retain their current shares in the Co-operative and supplier shareholders will continue to supply their livestock through the Co-operative,” said Mr Hewett.

When the news of Silver Fern’s Chinese deal broke, the Alliance Group also confirmed that it had been in discussions with Silver Fern to join forces and it said that it had also submitted a bid for the company before it had started its capital raising process with Shanghai Maling.

“We have evaluated the potential for a merger with, or the acquisition of all or part of, SFF on many occasions over the last 10 years. Our view has always been consistent.

“The business case for any merger or acquisition needs to stack up, the benefits must be accurate and the risks clear.

“We’ve let our shareholders know that we’ve been examining opportunities for industry consolidation that have merit, but we’ve been limited in what we have been able to say.”

Mr Taggart added that Silver Fern’s decision to sell half its business to Chinese investors meant that the Alliance group was now the only 100 per cent New Zealand farmer owned meat processor in the country.

“We remain firmly committed to maintaining Alliance Group’s purpose as a co-operative business owned by farmers for farmers,” he said.

“We believe it is important for NZ farmers to retain ownership of their industry and the best way to achieve this would be to supply Alliance Group as the only remaining major co-op.”

Business analysts in New Zealand said that farmers within the two cooperatives had favoured a merger between the two meat New Zealand meat giants.

But the analysts had also warned about the threat of overcapacity in in both businesses.

Silver Fern Farms has 22 meat processing plants, while Alliance has eight sites, but Alliance estimates that Silver Fern is killing only a third more stock.Silver Fern saw sales rise by 16 per cent last year to NZ$2.28 billion financial costs of NZ$37.4 million contributed to a net loss of NZ$301,000, compared to a loss of NZ$37.4 million a year earlier.

Alliance's 2014 sales rose by 5.3 per cent to NZ$1.46 billion, and it reported a net profit of NZ$6.2 million.

In its proposal to shareholders, Silver Fern said: “As a result of the investment, Silver Fern Farms is expected to be debt free and have cash reserves at the end of next season – making it financially the strongest company in the New Zealand red meat industry.

“The new capital will provide the resources to accelerate our global ‘Plate to Pasture’ strategy.

“We will retain our global focus. The partnership proposal does not require Silver Fern Farms to supply any product exclusively to Shanghai Maling – any supply that is made will be on arms-length terms.

“And we will have a unique opportunity in China – the fastest growing market for red meat in the world. Shanghai Maling owns approximately 800 supermarkets and retail stores, including 56 specialty meat retail stores in Shanghai. Its meat sales network covers large to medium sized cities in Shanghai and other Chinese Provinces, and includes 19 wholesale facilities and a large e-commerce presence.”

The deal with the Chinese investors has been greeted with caution by the farming representatives in New Zealand.

Federated Farmers said it saw Shanghai Maling’s proposed investment as an overwhelming vote of confidence in the red meat industry, however the organisation said it was encouraging Silver Fern Farms' shareholders to carefully consider the offer.

President Dr William Rolleston said that, while the offer strengthens the business and offers potential for further growth in the Chinese market, there are some key issues for shareholders to work through ahead of the special general meeting on 16 October.

“Silver Fern Farms buys and processes a considerable proportion of New Zealand’s beef and lamb, so we need it to be sustainable and successful. The proposed joint venture has the potential to create significant opportunity, but shareholders need to consider the offer in detail,” he said.

“There are a lot of factors that will ultimately determine whether this is the right deal for shareholders, and not all of them are clear from what has been announced today.

“Key questions include what value has been placed on Silver Fern Farms' significant body of intellectual property and whether a strong emphasis on the Chinese market will prove restrictive if that market weakens.”

Shanghai Maling is a listed company based in Shanghai and is 38 per cent owned by the Bright Food Group.